After near-record level, crude closes lower

SAN FRANCISCO (MarketWatch) -- Crude-oil futures closed lower Thursday, retreating from the near-record levels above $77 a barrel they saw earlier in the session, as the drop in the broader U.S. stock market sparked concerns that a weak economy will diminish demand for energy.

Crude for September delivery had climbed as high as $77.15 a barrel on the New York Mercantile Exchange but dropped back to $74.95 to close 93 cents, or 1.2%, lower. The contract reached a high of $77.24 in electronic trading.

The "stock market is a leading indicator of the economy," said James Williams, an economist at WTRG Economics. And "the greatest downside risk to oil prices is a weak economy."

The 'stock market is a leading indicator of the economy. The greatest downside risk to oil prices is a weak economy.
James Williams, WTRG Economics

John Person, president of NationalFutures.com, said, "Oil prices may be seeing some profit taking as it reached nose-bleed highs this morning, based on the equity market's plunge."

"Traders in times of market meltdowns tend to play the cautious side and move into cash," Person said in e-mailed comments. "Therefore, those who were long may be enticed to make way for the exit doors."

Even so, September crude peaked at levels unseen since mid-August. Prices for a front-month futures contract touched an intraday record of $77.95 and closing record of $77.03 during the regular session on July 14, 2006. The lifetime high for a front-month contract in electronic trading stands at $78.40 from mid-July of last year.

Prices had spent much of Thursday gaining ground on growing concern over falling supplies at a key U.S. delivery point for the crude futures contracts.

But while Wednesday's updates on U.S. petroleum supplies "showed lower crude stocks both at Cushing and nationwide, it is normal for stocks to decline at this time of year," said Williams.

Stocks at Cushing fell to 21.2 million barrels last week from 22.6 million during the week ended July 13, according to the Energy Department report issued Wednesday.

The decrease of supplies at Cushing, Okla., the delivery point for Nymex crude contracts, has caused the spread between West Texas Intermediate crude and Brent crude to narrow, said Phil Flynn, analyst at Alaron Trading.

WTI is "regaining its crown as the benchmark crude," he said, noting that it's moving toward a premium to Brent crude for the first time since February.

September Brent crude climbed as high as $77.16 a barrel Thursday on the IntercontinentalExchange, then fell to $74.93, down $1.14.

OPEC doubt

Crude futures had fallen more than 3% from last Thursday through Tuesday, retreating on the perception that the Organization of the Petroleum Exporting Countries will pump more oil.

Now the market is "less than impressed with their comments," Flynn said of the cartel.

"The market is starting to doubt OPEC's ability to increase production," he said. "That's adding to the bullish momentum right now."

Meanwhile, "another defiant statement from Iran, vowing to never suspend their nuclear program, was another element" supporting crude, according to Michael Fitzpatrick, analyst at Man Financial. In a note to clients, he pointed out that Man Financial has said the situation has not changed despite high-level Iranian-U.S. contacts about the security situation in Iraq.

Against this backdrop, crude futures rallied more than 3% on Wednesday to close near $76 a barrel, finding support from a third-weekly decline in U.S. crude supplies as well as a technical boost from a temporary halt in CME Globex trading. Read more.

Crude supplies fell by 1.1 million barrels for the week ended July 20 to total 351 million barrels, the Energy Department reported Wednesday. Crude inventories have fallen a total of 3 million barrels over the past three weeks, but they're still 5.4% above the year-ago level, the data showed.

Petroleum-product prices closed lower along with crude Thursday on Nymex. August heating oil shed 3.31 cents to end at $2.0328 a gallon, while August reformulated gasoline fell 1.2 cents, or 0.6%, to close at $2.0759 a gallon.

"Gasoline futures have dropped from a 2007 high of $103 a barrel in late May to about $89 a barrel at the moment," he said in e-mailed comments.

"One can talk about all sorts of news events that might be impacting crude, but the bottom line is that the huge money funds and managers continue to view investments (or speculative positions) in crude as a prudent place to park money," he said. "They had that same viewpoint last year until, say, Aug. 10, and suddenly there was an epiphany where the maddening money crowd realized that oil was overpriced."

Natural gas inches up

Rounding out the action in energy trading, natural-gas futures closed slightly higher, defying weakness in oil with some traders deciding that the commodity may be oversold.

August natural gas closed up 1.8 cents at $5.943 per million British thermal units.

"A lot of business is being done ahead of tomorrow's expiry" of the August futures contract, said Beth Sewell, a managing partner at Quantum Gas & Power Services Ltd.

Natural-gas inventories rose by 71 billion cubic feet for the week ended July 20, the Energy Department said earlier Thursday.

Strategic Energy & Economic Research and Global Insight had both been looking for a buildup of 69 billion cubic feet.

Total inventories now stand at 2.763 trillion cubic feet, up 6 billion cubic feet from the year-ago level and up 384 billion cubic feet from the five-year average, the government's data showed.

Looking ahead, "despite downward revisions to hurricane forecasts, there is still weather risk to contract prices at the short-end of the curve," warned Jason Schenker, an economist at Wachovia Corp. "Because of the recent sell-off at short-end contract pricing, serious storms could cause a sharp rise in prices."

Still, "the upside risk to natural-gas prices could be muted with inventories at such high levels and poised to rise further," he said in a report to clients.

In related news Thursday, the Federal Energy Regulatory Commission said Amaranth Advisors LLC and its former trader, Brian Hunter, should pay $291 million in fines and penalties for alleged market manipulation in gas futures early in 2006. See full story.

In equities, oil and gas stocks were not immune to Thursday's heavy selling. The Amex Natural Gas Index
$XOI
suffered the biggest losses, with shares of Exxon Mobil
XOM, -0.32%
on the decline after the company's earnings disappointed Wall Street. See Energy Stocks.

And in other commodities trading, gold futures fell $11 an ounce to close at a more than two-week low. See Metals Stocks.

Taking a broad measure of the commodities markets, the Dow Jones AIG Commodity Index
26099104
was down 0.5% at 168.74 points.

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